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Flood costs pile up as TD unit warns of loss

Toronto-Dominion Bank is expecting to report third-quarter losses of nearly $300 million for its insurance business, in part due to claims related to damage caused by severe weather events in Ontario and Alberta.

And according to one analyst, it may not be alone in taking a flood-related hit.

TD Bank announced in a statement Tuesday the net loss in its insurance arm could be between $240 million and $290 million, the result of approximately $418 million after tax, or 45 cents per share, of charges related to the flooding in southern Alberta and in the GTA this summer, and to increased general insurance claims.

The company expects claims for evacuation and home and automobile damage due to both floods will total about $125 million after tax.

“We did not expect these charges to be as large and the stock is likely to react negatively initially,” Andre-Philippe Hardy, analyst at RBC Capital Markets, said in a note to clients.

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Shares for TD ended the day at $87.25, down $1.64 or 1.85 per cent from Monday’s price. The company will report its third quarter earnings at the end of August.

In a note, Michael Goldberg of Desjardins Securities said the Royal Bank of Canada and Canadian Western Bank are also expected to record charges due to severe weather, but could not say how much they may amount to.

Excluding the charges, third-quarter insurance earnings are estimated to between $130 million to $180 million after tax, the statement said. TD expects what it calls “a modest decline” in insurance earnings from the normalized 2012 level of $600 million. Hardy said the company relies on its insurance business for eight per cent of total earnings.

More troublesome to analysts was TD Bank’s revelation that its insurance arm will increase claims reserves by about $292 million after tax, attributable to an increase in third-party bodily injury claims last year.

“A continued increase in litigation, particularly in urban areas such as Toronto, is contributing to greater uncertainty in determining the ultimate expected costs of settling bodily injury automobile claims. In addition, fraud continues to pose uncertainty related to accident benefit claims in Ontario,” said the statement.

This probably won’t be the only time TD Insurance will have to bolster its claims reserves to mitigate higher claim frequency, said Tom Lewandowski, financial services analyst at Edward Jones, in an interview.

“I would expect them to probably have to do a couple more of these, this is going to something I think you’re going to see with the industry just because this is emerging at a much higher clip than people had originally anticipated,” he said.

Robert Sedran, analyst at CIBC World Markets, wrote in a note to clients that this development “questions the outlook for one of the businesses on which this bank was relying to provide much-needed growth to make up for a slowdown” in real-estate secured lending, and in overall consumer lending.

The announcement comes on the heels of revelations of losses from two Canadian insurance companies. Co-operators General Insurance Company dropped to a second-quarter loss of $5.9 million, mostly on costs from the floods in Alberta. The company said it lost around $77 million before taxes as a result of the Alberta floods, even after collecting reinsurance.

Intact Financial Corp., which is Canada’s largest publicly traded property and casualty insurance company, expects to book about $257 million in costs over the second and third quarters as a result of catastrophic losses.

Intact’s estimate includes costs associated with the Alberta and Toronto flooding and the Lac-Megantic train disaster in Quebec in July.

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